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Monday, August 22, 2011

2008 Aftershocks and the World Economy

by Michael Blim

Call them aftershocks: the sovereign debt crises and the return to zero growth and recession in developed countries, along with the current world stock market “correction.” Add in the wry spectacle of the flight to U.S. bonds as doubt that America will ever pay off its debts, and you have the rather sorry description of a world economy still reeling from the earthquake of 2008.

Different sets of players do their bits. Economists and the world financial elite keep trying to treat each crisis discreetly, finding a cause here, a remedy there, and hoping that the rest of the world economy will keep vamping as they fix each one. Financial market traders, selling on good news, and buying on bad, or the other way around if it suits them, put words to the numbers. “The markets are worried about Libya,” ‘the market is pricing in the impact of unemployment rates on overall demand,” and so on. The “market” in this turn of phrase is like an open-source mind transforming words into numbers, which of course makes one wonder how those chatty traders have mind enough to change the numbers back into words again. Finally, nightly news reports put the two tracks, words and numbers, back together, and each of us tries to understand what just happened, and with more preoccupation what might happen tomorrow.

Each of the estates in their way is trying to handle the aftershocks of the crisis that began in the fall of 2008. The economists and financial elite are trying to end them, or contain their damage. The market players are betting on scenarios that will make them money. And the news media are trying to write the story as others tell it to them.

Yet the estates have neither fixed “the problem,” nor assuaged the fear that the 2008 economic earthquake was the global North’s “big one,” and that the world as we know it has undergone a profound and fundamental change. The great tectonic plates upon which the world economy stands have shifted its center south and east to the “emerging economies.” And the collision between the emerging and developed economies, the cause of the quake, has left the latter so deeply damaged that the failure of successive rescue efforts threatens the short-term viability of the world economy itself.

China as the new center of the post-2008 world is the metaphor most used, but it is perhaps only finally one quarter to one third of the story, in terms of economic growth. The emerging world in toto has “emerged,” producing more goods and services than the developed world since roughly 2005-2006. Their combined GDP last year was approximately 140% that of the developed world’s GDP. Since the late nineties, their rate of growth has climbed from 3% to 6% per annum, while the growth rate of developed economies has declined during the same period from 3% to 1% per annum. (Financial Times, August 2, 2011, 10)

These facts index the “continental drift” of the world economy toward the East and South. Their consequences appear more obvious with each aftershock. Put simply, the emerging economies are making and selling more of the world’s goods, and the developed economies haven’t enough money to pay for what they have bought. The developed economies’ IOUs as expressed in bonds and loans have grown so great that either emergent economy creditors will eventually be forced to accept less than full payment, or developed countries will be forced to reduce their standard of living to pay off their debts. Martin Wolf of The Financial Times has warned repeatedly that the great financial imbalances based upon this production shift in the world economy constitute the greatest future danger to Northern economic recovery and world financial stability.

Aftershocks in the natural world do not cascade in logical fashion. Their amplitude, location, and sequencing are irregular. New cracks open, new tremors occur, and their amplitude varies in part by where and how long after the quake they occur. So it is with the economic earthquake of 2008. The breaking up of “the Northern plate” has triggered a dramatic shrinkage in overall output, though the United States and Great Britain were initially hit much harder than leaders in Europe. Some Northern banks were hit harder than others, but capital shortages and bad debts, including the bad debts of sovereign nations, have spread the crisis throughout the Northern world of finance. Fiscal crises have spread from Northern state to Northern state, as the debts taken on in recession coupled with the continental drift of economic decline are creating mountains of liabilities whose retirement, if ever, has begun to stretch out over the next thirty to fifty years. A perverse equality has settled over the North: we are all debtors now.

US sovereign debt, configured in once almighty Treasury bonds, is the excess “money” the world needs to cover its international debts. As such, the United States faces less of a debt crisis than do other countries whose bonds are not accepted as virtual money. A certain cynicism seems to be surfacing in world financial circles, however. It is beginning to seem as if no one really expects the U.S. to keep making good on its paper over the long run, even as no one wants to say so for fear of triggering the kind of bond collapse that would bring down the current world financial system.

Such an aftershock is not immediately likely, but not impossible either. The odds are imponderable, and this is why the metaphors of earthquakes and aftershocks are apt. A U.S. bond crash, I think, would less likely be precipitated by continued Congressional idiocy than by a shrinking economy that would increase worldwide worry about America’s ability to keep paying down its debts. The quake has opened new fissures, new and more onerous funding gaps throughout the world financial system, but particularly between the North and the global South. A panic among the buyers and sellers and fixers that keep goods, services, money, and debts chasing each other across the geographic plates of the world economy with the aid of the “excess liquidity” provided the world by U.S. bonds would be a more likely cause.

This means that the United States economy must continue to rely largely less on the kindness than on the desperation of strangers. Renewed economic growth would restore some confidence in our ability to pay, as well as increase our actual ability to pay off our debts. Massive budget cutting, as Paul Krugman has noted repeatedly, will make economy recovery much less likely, and thus the hole of American indebtedness that much deeper. An international crisis of confidence in U.S. bonds would then be much less further away.